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Selection of a topic and appropriate organization plays a vital role in success of a Research Project. I looked into different sources and considered recommendations from my teachers as to which topic should be chosen. In order to assist me, I was provided with a list of 20 different topics in Information pack from which I chose topic 17 - "An assessment of the quality of the corporate governance within an organization and the impact on an organization's key stakeholders'' for my Research and Analysis Project.
'' Corporate Governance involves a set of relationships with company's management, its board, shareholders and other stakeholders. Corporate Governance provides the structure through which objectives of the company are set and the means of attaining those objectives and monitoring performance are determined '' (OECD Principles of Corporate Governance Preamble 2004, p.11)
Energy Sector, Infrastructure as well as consumer goods production are the diverse industries in the U.S. It includes a large number of companies and some very popular indeed. I decided to choose GENERAL ELECTRIC INTERNATIONAL (hereon referred as GE) which is an American Company listed in New York Stock Exchange (NYSE) and has its headquarters situated in Fairfield, Connecticut USA. Its operations are widespread and the company offers businesses in Lighting, transportation, infrastructure, industrial products, power transmission and medical equipment.
GE started off with an innovation of Electric Light Bulb by Thomas A. Edison and his company in 1878 which later merged into General Electric Company later in 1892 (Anon, 2012). It has a vast Global business and has been in operation for over 125 years! GE employs more than 300,000 employees worldwide and operates in more than 100 countries across the Globe. (Mote, n.d).
Reasons for choosing the topic:
The reason I chose this topic was mainly due to my previous knowledge in this area. The knowledge and concept I acquired regarding this topic in my previous ACCA papers specifically F8 and P1, motivated me to dig in deep in this business area. Recent corporate scandals of Enron, Arthur Anderson etc. (LSBF, 2009) also urged me to explore the relationship between Corporate Governance and the performance of the organization.
Information Access & Availability
Information related to corporate governance and its impact was widely available on the internet as well as in different books. It was easy for me to gather healthy information from numerous sources such as company's website, Stock Exchanges etc. which lead me to choose this topic and explore it further.
Corporate Governance is an important issue in today's world and has a vast impact on the operations of different businesses. It is important for companies to take its significance into consideration as it may affect company's performance and its impact of the stakeholders. This made me realize its importance and how I might use this knowledge to enhance my future opportunities and excel in my career.
Reasons for choosing the organization
GE Intl. is a well-known organization around the world and has been in operation for many years. I was keen to know about the company's historical background and explore it further.
I'm also aware of a number of electronic households that I used in my home are a product of GE, yet another reason for choosing and knowing more about this organization.
GE international is a well-known organization and is perceived to have rich history in governance in USA. I want to know if it complies with the rules and how far is it true.
Under this section, project objectives will be set out aiming at the accomplishment of these objectives.
Here under are the objectives regarding my Research and Analysis Report:-
To carry out an analysis about the extent to which corporate Governance contributes to sound performance in GE.
To assess the level of flexibility and extent of the control environment in GE to contribute to good CG practices.
To evaluate the potential impact of adopting such practices on the stakeholders.
Analyze effect of Good Governance practices on company's financial performance.
To identify any non-compliance to the Governance codes and evaluate the reasons of non-compliance.
Analyze GE's practices with its direct Competitors in related industry.
A research question is an important part of a research as it guides our arguments in a way to catch the interest of the reviewer.
Following could be the possible research questions for this RAP:-
What Corporate Governance Code is GE Following?
To what extent does GE follows it's Governance Principles and complies with respective codes and best practice?
Is GE effectively identifying and fulfilling the needs of its stakeholders?
What impact does the Corporate Governance principles might have on the stakeholders identified?
Overall Research Approach
My overall research is based on the collection of information from different sources such as internet, books, journals, newspapers etc. A comparison is also carried out with the Company's compliance with Sarbanes-Oxley Act "the Act" as well as NYSE Rules with Company's practices.
The Research is mainly based on the secondary source of information as it was relatively easier and cheaper to carry out. Other than that, the primary source of information was hard to collect due to certain limitations discussed further in the project. The sources provided me with wide range of information related to the industry which made me carry out effective analysis.
Since the topic chosen tends to involve more of non-financial analysis, the research also involves a bit of financial analysis as well. For instance, Ratio Analysis was used to compare information between companies as to how the financials are affected because of compliance with the Corporate Governance Principles.
Lastly, I used Ratio Analysis for comparison with its competitors and evaluating the impact on the shareholders. Most importantly, I ensured my research was in line with the objectives and research questions were being met.
Information Gathering and Accounting/Business Techniques
Sources of Information
The two widely known sources of gathering information are Primary and Secondary Sources of Information. It all depends on the researcher as to which source is appropriate to use since there are some limitations attached to it as well. The following are the two main types:
Primary information can be collected through interviews, intensive observation and surveys (Neel, 2011). However this type of data collection approach will not be used in my research as it is time consuming, costly and may cause difficulty to evaluate and analyze since the amount of data is very large (Blurtit, 2012). Since the organization chosen is U.S. based, primary data collection was not possible.
The information available in books, newspapers and internet is primarily collected by someone else but used by the researcher as secondary information. In my research, secondary sources of information were extensively used to gather information as it helped me fulfill my research objectives easily. I focused on the use of electronic sources such as internet as well as some text books and different articles were also referred to carry out the research.
Methods used to collect information
Internet was one of the major sources used to gather information for this project and was widely used to support the objectives of this research. Many websites and online newspapers/articles & business magazines e.g. Forbes, Economist & CNN were used to acquire information. This helped me quicken the research process and attain advantage over time.
Moreover, Information required about GE, such as history, annual reports and Governance Principles etc. were obtained directly from the company's official website.
Library was also one of the methods used to collect information. Information relating to the Corporate Governance, in general, was gathered by exploring different books especially ACCA study text books. Moreover, my University's library : Tun-Hussein-Onn Library, has e-search facility that allowed me not only to gather required information but also made the task quite easy and quick.
GE's Annual meeting and proxy statement was easily available from the company's website and was used to get know how about the company's corporate Governance Practices.
Limitations of information gathering
Since the research was undertaken using mainly the secondary resources, it had some limitations as well to deal with. Some of them are as follows:
Inaccuracy of Information
As it is known that secondary data is collected by the person other than the researcher himself, such information is likely to have errors and might not be accurate. Some websites and articles did not seem authentic to take information from, in such cases reliance had to be placed on company's official information.
Since GE is based in U.S, physically viewing the annual reports and visiting the company resulted in limited information being collected. To overcome this, I had to place reliance on the secondary source of information for my research and gather information from company's annual report and proxy statement.
Biasness of Information
Information contained in the company's official website and annual statements was certainly 'management biased'. In order to elude this uncertainty, I decided to use my own knowledge gathered from previous studies to assess the information and ensure that the research is logical and unbiased.
Obsolete & Outdated information
There was some information regarding the governance principles on some websites and articles which was not updated according to the new principles of governance. As this information was taken long time back, threat of obsolescence and outdated information was present. This perhaps caused a limitation to my research work in a way that the old information, if used, could have made my research less reliable and ineffective.
Ethical Issues faced during Information Gathering
It was important for me to carry out the research by keeping ethics in view as well. I did face some ethical constraints during the research. Some of which are as follows:
Integrity and Plagiarism
It was deemed necessary for me to prepare my research and Analysis project with sufficient information and provide relevant references to avoid the threat to plagiarism. The De Montfort University Student Regulations (DMU Student Regulations 2009, p.03) states that "plagiarism is the significant use of the work and knowledge of other individuals and submitting that information as if it was their own work". The challenge was overcome by making proper references and to do so, I was required to use the Harvard System of References in my project according to OBU guidelines.
Second hand work
Once again, when carrying out my research I was necessary for me to consult some other research projects of my friends to get to know about the layout of an effective research. Although I attained some improvement ideas on the presentation of information I avoided using any written knowledge in those projects. Even if I did, I felt it necessary to take permission before I used it in my project.
Many organizations are hesitant to provide all the information to the public and have to keep some crucial information confidential. However, being a student I did not face any such ethical issue regarding the collection of information for GE since the research was inclined more towards secondary information.
Apart from the above issues, it is even more important to have a set objective and a proper frame of mind to undertake any research and analyze information without any hindrance of ethical dilemmas. Hence, to ensure that everything stays on the right path, I based my research on the information collected from authentic and reliable sources that helped me evaluate the relevant information accurately and effectively.
Accounting / Business Techniques used and their Limitations
Following the Code of Best Practice
Sarbanes-Oxley Act of 2002 (SOX)
New York Stock Exchange Listing Requirements (NYSE Rules).
GE's Governance Principles.
Compliance with Securities and Exchange Commission (SEC).
However, there arose a number of limitations as well as to how the principles were applied and complied with by GE. GE's Board of Directors ''Recognizes that there is an ongoing and energetic debate about corporate Governance" (GE, 2012). The company has its own set of Governance Principles and allows an annual review of these principles to ensure they are in line with Sarbanes-Oxley Act.
Use of Mendelow Matrix
"Mendelow (1991) developed a framework to help analyze stakeholder power and interest" (Norton, 2008). "Mendelow Matrix helps to identify the relationships that should be built between different stakeholders" (Dalton and Best 2006, p.23). The stakeholders' position can be identified using this Matrix and it depends on mainly two factors: Power and influence. For detailed analysis and correct identification of GE's Stakeholder, this technique was brought into use.
However, there's a possibility that the number of different stakeholders in a particular quadrant could be more than one which can result in conflicts in decision making process and hinder progress (Campbell, 2008, p.46). Additionally, it emphasizes more on the one's which have high power and interest and those stakeholders with less influence are simply ignored.
Following illustrates the Mendelow Matrix:
Figure 1: Mendelow Framework
(Mendelow Framework cited in Campbell, 2008, p.46)
Despite the fact that my topic involves qualitative analysis, narrow application of ratio analysis was required to justify whether good corporate governance contributed to good performance of GE and its impact on shareholders, hence limited number of ratios were used.
However there are some limitations attached to ratio analysis. For instance, frequent change in price levels may affect the validity of ratios for different time periods. Also, similar businesses use different accounting procedures which can make comparison with other companies difficult as well as misleading (Accounting for Management, 2012). Moreover, the ratios are meaningless without any comparison with industry average or other related companies.
Results, analysis, conclusions and recommendations
The analysis on this research focuses on the CG principles followed by GE under Sarbanes-Oxley Act of 2002 (SOX) and its compliance with NYSE & Securities Exchange Commission (SEC) respectively.
Compliance with Corporate Governance Framework:
Sarbanes-Oxley Act of 2002 ("the Act")
The Sarbanes-Oxley Act of 2002 amends the U.S securities and other laws in a significant ways. The Act, which is rules-based, changed corporate reporting, regulations for audit firms, Corporate Governance as well as the responsibilities of directors and officers. It has many provisions that have been enhanced by the Securities Exchange Act of 1934 ("The Exchange Act") (Lander, 2003).
"The Act is mandatory and is required to be followed by all US and non-US listed Companies. Compliance with the legislation need not be a daunting task, like every other regulatory requirement it should be addressed with thorough study and proper analysis" (Sox Law, 2006).
Compliance with NYSE and SOX is mandatory under U.S. Law. Some Major Principles under SOX are illustrated and discussed below:
Chairman and CEO:
Jeffery R. Immelt is the current chairman and CEO for GE International succeeding John F. Welch, Jr. in 2001 and has retained the title since then (GE Leadership, 2012). The role of chairman has been clearly stated in the UK Combined code (FRC 2010, p.10) as being responsible for sound leadership on the board as well as ensuring effectiveness of the role. According to Garten (2001, p.5) the chief executive officers or the "top executives, lead the organizations with enormous reach".
GE tends to stick with this ideology of having single person being the CEO as well as the chairman of the board. Even though many companies in the U.S are splitting the roles of CEO and Chairman, starting from 27% in 2004 to 40% until 2011, and gaining momentum, GE has not yet split the roles and considers dual role to be more effective (Flannery, 2011). As per the requirements of SEC, rational reasoning is required to be explained to the investors by all public Companies for allowing a person to handle both the roles.
Despite the fact that proposals were made by the potential shareholders against the dual leadership role arguing that one person serving both positions might also hinder the board's ability to monitor CEO's performance (Proxy Statement, 2012). The board believes that the combined role provides an effective structure, communication and oversight by the independent board than an independent chairman and serves to minimize any potential conflicts that may arise due to the combine role of chairman and CEO (Proxy Statement, 2012). This, at the same time also ensures the fulfillment of explanation required by SEC to be provided to the shareowners of the company.
Comparatively, Siemens follows the same organizational structure of having combined role of CEO and Chairman (Siemens, 2012). Philips, however, has 2 tier board structures but overall the role is held by a single person who is the chairman & CEO of the company (Philips, 2012).
As per objective (5), GE & its competitors do not seem to follow the ideology of independent roles of CEO and chairman. Therefore, it is important to have separate roles in order to remove one person from dominating and avoid any conflict of interest.
Director's independence has grown into importance in the U.S. SOX has laid great emphasis on the director's independence and enforces them to be separate from the management to prevent biasness and other management abuses from occurring. According to Dravis (2007), independent directors can provide a better oversight to the company and a good opportunity to overcome 'wishful thinking and loss aversion influences' on the decision making.
GE has a healthy set of Governance Principles that also cover the independence of directors. The company seeks to have at least one third of its board to be independent. The guidelines established by GE also assist in determining independence according to NYSE listing rules as well. In this respect, GE complies with the SOX guidelines on the board independence (Sarbanes-Oxley Act 2002, s.101).
Currently the board consists of 16 Independent Directors of a total of 18 under GE's independence guidelines and NYSE guidelines (GE Independence, 2012). Operating multiple roles impairs board director's independence hence leading to accountability issues but GE is in overall compliance with SOX requirements by having sufficient number of independent directors.
Unlike GE, Philips & Siemens both follow two-tier board structure having independent supervisory board. It is made sure that the member of supervisory board cannot be a member of board of management (Philips AR, 2012) thus adding independence to the board. Siemens management ensures integrity and independence in the supervisory board having sufficient number of directors, thus complying with their bylaws (Siemens AR, 2011).
Board Committees, Composition and its practices:
Since the US Corporate law recommends for a single board structure in the listed companies in U.S, GE adopts the same unitary board structure without any supervisory or management board. The Co.'s board consists of a number of sub board committees established to perform specific operations & are delegated with certain responsibilities to carry out the tasks effectively to "assist the board in overseeing reputational risks" (GE Governance s.4, 2012).
This is illustrated in the Figure below.
Figure 2: General Electric Sub Board Committees, (GE Committees, 2012)
The Following Pie chart shows the board composition of GE.
Figure 3: Board Composition of General Electric (GE, 2012). Refer Appendix 2
Majority of these are Non-Executive directors to ensure independence is maintained and unbiased opinions are provided on the board. Total board attendance is to be reduced to 16 by 2013 AGM. This is in compliance with the SOX requirement stated above, thus adding value to company's governance. The board directors are nominated year by year by its shareowners & it is important for the board to appoint members who have the ability to lead GE in the light of Success and continuous Growth (GE Governance, s.5 2012).
Siemens AG tends to have 6 Supervisory board standing committees as compared to GE's 5. They hope to maintain the current mix of supervisory board members for the year 2013 in compliance with the respective rules (Siemens AR, 2011). As for Philips, it also complies with the requirement of having sub board committees and does manage to have Audit, remuneration & CG committees respectively with independent members on board (Philips AR, 2011).
The board of GE consists of personnel with highest level of integrity &values which is in line with the above mentioned SOX requirement. It is therefore necessary to have personnel that have the right balance and mix of skills, experience and knowledge to serve and lead the board effectively and ensure company's smooth progression in the long run.
Remuneration should be sufficient to attract and retain employees in an organization. It must include a balance of financial and non-financial rewards to motive employees. GE Compensation committee carries out analysis, reviews and discusses with the management before finalizing the remuneration & disclosures in the form 10-K.
To meet SEC's requirements, GE discloses a realized compensation table of the executives in W-2 form & fulfills compensation disclosure requirement in its proxy statements annually. All this is decided through consultation with the compensation committee. Certain things such as Eligibility, limitation, performance etc. are considered and board approval and critical evaluation is undertaken in determining the amount of director's remuneration (NYSE 2003, s.303a).
Following shows CEO remuneration Mix of GE & its competitors for 2011: See Appendix 2 & 3
Figure 4: GE Remuneration (Proxy Statement, 2012), Siemens Remuneration (Siemens AR, 2011), Philips Remuneration (Philips AR, 2011)
Comparison with its competitors shows that Remuneration in GE is quite fair. Siemens Bonus too is heavy amounted but base salary is comparatively lowest. GE seems to have a right balance of remuneration elements for CEO however; criticism against GE for not paying 'a dime' to federal taxes and the CEO enjoying $15m compensation as well as a bonus of $4m has created worrying signs lately (Saunders, 2012).
Therefore the remuneration of executives - bonus specifically, should be reasonable and not too high that may create a dent on company's reputation.
Whistleblowing can be defined as "an act of a person who overrides the interest of an entity he serves for the best interest of the public, by blowing the whistle publicly if he believes the entity is involved in an illegal or fraudulent activity" (Lewis, 2001). In contrast with whistle blowing, GE also lays great emphasis on the ombudsperson process. GE has the policy to take disciplinary action against the employees who do not report the suspected or known concern to the Audit committee and the board (GE Ombudsperson Process, 2009).
Through Ombudsperson, GE allows its employees report irregularities to the management & is responsible to resolve whistleblowers complaints. It enables the company to help employees raise questions with confidence and ensures that effective governance takes place within (GE Ombudsperson Process, 2009).
GE Complies with the above requirement under SOX which also includes mentioning of certain restriction on the acts of employers who may discriminate the employee in "terms and condition of employment" even if they do the lawful act.
Having a code of conduct and underlining culture of ethics constitutes greater level of Corporate Governance in the Company. GE has had this culture for many years and has policies regarding any GE's Conduct, accounting policies, internal controls or auditing matters. GE welcomes its employees to address the issues with the presiding director or the audit committee.
Criticism arose when GE fired a whistleblower for co.'s violation to an act in Iraq for reporting this to his supervisor and GE's ombudsperson. GE claims that the whistleblowers aren't entitled to protection under SEC whistleblower program because he reported internally rather than SEC. This process could merely be a requirement to add to good governance however, the case clearly created outrage when a company's own internal control programs are not taking things seriously and firing employees instead!(Kelton, 2012).
The following path could be followed by the whistle blowers to raise any integrity concerns within GE.
Figure 5: General Electric Concern Reporting Channel (The Spirit & The Letter 2008, p.11)
GE's competitor Siemens also follow ombudsman policy and "tell us" to ensure complaints are resolved in time (Siemens AR, 2011). Philips also adopts its whistle blowing policy and a formal reporting procedure to seek transparency and accountability by all employees (Philips AR, 2011).
The strength of this process could be judged from the Ombudsperson Chart provided in appendix 1 as to how GE controlled and resolved the issues raised with time.
GE's audit committee holds the responsibility of review the financial reporting process whereas the management is primarily responsible for maintaining adequate internal financial controls for the preparation of financial statements (Proxy Statement, 2012). The committee consists of 6 members in with Douglas A. Warner III being the chairman. This composition is in line with the NYSE requirement of at least 3 members in audit committee. Moreover the chair of the committee has the authority to pre-approve any audit or non-audit services on behalf of the committee if a single engagement exceeds $1m.
As stated in the rule above, The Act lays great emphasis on the rotation of audit partners every 5 years. GE has been enjoying audit and other services from KPMG since quite a long time, in fact a 100 years! This has raised numerous issues in the media for attaining non-audit services from the same audit firm (McKenna, 2012).
The Company also got away with a proposal which was supposed to be included in 2012 proxy statement regarding mandatory auditor rotation (Orsagh, 2012). However, no action was taken & this lead to criticisms and the co. paid a hefty fine amounting to $50 million to SEC for earnings manipulation through accounting- right under the nose of KPMG (Orsagh, 2012).
According to the Forbes magazine, an article stated that KPMG earned 10 percent of their total audit fees from GE in relation to tax services without having any direct or indirect connection to audit. In respect to SOX, even though they got away with the fine, these services should never have been provided in the first place (McKenna, 2012).
Considering objective (5), Philips does seem to comply with the SOX requirement of committee representation by having 4 members. It also evaluates external auditor's performance every 3 years to ensure independence (Philips AR, 2011). Siemens on the other hand too ensures pre-approval is given by the committee for any audit related services provided by E&Y (Siemens AR, 2011).
Code of Ethics
Objective (2) of this research is related to this sub section as good ethics contribute to effectiveness in control environment. Having a culture of ethics in an organization enables it to take strict actions against any unethical act whether external or internal and directors are permitted to report unethical behavior to CEO (GE Governance 2012, s.12). As a company grows and becomes more powerful, as in GE's enormous business growth around the world, ethics become increasingly important (eHow, 2012).
The following list shows the clauses in GE's Code of Conduct which emphasizes on "obeying the applicable laws and regulations governing our business conduct worldwide" and complies with the SOX requirement at the same time by embedding it in the company's culture.
Figure 6: GE Code of Conduct (The Spirit & The Letter, 2008)
GE has had a good history of business ethics where according to Ethisphere Institute; GE, eBay and Aflac are among the worlds "most ethical companies" (Warc, 2011). One of the ethical cases against GE was in 1999 when in Chicago, GE collected Debts from its consumers by unfair means and was ordered by law to reimburse them and this amounted to $147m (Orsagh, 2012).
Moreover, Philips also emphasizes on following its financial code of ethics by all the employees. Like GE, it gives great importance to GE and has over 30,000 employees participating in various ethical training programs (Philips AR, 2011). Siemens too follows the SOX code and complies with the ethical requirement. "It is top performance with highest ethics that has made Siemens strong" (Siemens AR, 2011).
It implies that good ethics does play an important role in an organization and GE and competitors do comply with this requirement effectively. Therefore, ethics should be given high priority to ensure sound governance takes place in the entity.
Relations with Shareholders and Disclosures
Disclosure is an important part of good corporate governance as it allows reduction in information asymmetry as well as more open communication and view of the company's performance. GE meets this requirement of SOX by filing disclosures to the SEC in its form 10-K every year.
GE believes to have a healthy relationship with its shareholders and determines to have annual meetings for discussion of proposals as their voting power may influence company's performance. Article 7 of the company's By-Laws also stresses on the frequent and timely meetings with the shareholders to ensure effective communication (By Laws, 2011).
In contrast to its competitors, Siemens also ensures NYSE and SOX rules are followed in relation to disclosure by having an independent Disclosure Committee (Siemens AR, 2011). Philips too incorporates fair disclosure practice in its investor relations policy and complies with NYSE CG standards (Philips AR, 2011).
In short, GE complies with the disclosure and communication with shareholders requirements pretty well apart from the succession of CEO. Shareholders have raised concerns about this in almost every proxy statements but have never been voted FOR in the meetings.
Impact of CG practices on Key stakeholders of GE
Stakeholder is "any individual or a group of individual who can affect and be affected by the policies, practices and operations of an organization" (Polonsky, 2005). Considering objective (3) of my research, key stakeholders of GE will be identified and the impact of Corporate Governance on these stakeholders will be discussed here under.
General Electric Stakeholders Analysis
Good Corporate Governance is likely to have a positive impact on the key stakeholders of a company and it is importance for entities to clearly identify & classify their stakeholders and consider their needs and wants.
Figure 7: Recognition of GE's Stakeholders
In accordance with objective (3) of this research, Mendelow's matrix is used to analyze the power and influence of the above stakeholders and place them in the matrix accordingly. This is illustrated below:
Pressure Groups Power
Figure 8: Mendelow Framework
The Matrix above suggests that GE considers its Directors, Customers and Majority Shareholders as the Key Players as they tend to have high power and high influence that may affect the decision making of the organization. GE offers great support to its customers and employees thus proving to be good 'Corporate Citizen'.
The positive effect of good corporate governance on different stakeholders ultimately results in a strengthened economy and a tool for socio economic Development (Kumar, 2008). Shareholders are the true owners of the company and can therefore enforce their power to affect company's decisions. GE shareholders majorly comprise of institutional Investors and Mutual Funds who have a shareholding of 53% (Yahoo Finance, 2012). Thus, Mendelow places GE Shareholders in Key Players quadrant due to their importance.
The layout below shows the no. of shares and their estimated values acquired by the top Institutional shareholders.
Number of Shares
Estimated Value ($)
VANGUARD GROUP, INC. (THE)
BlackRock Institutional Trust Company, N.A.
Capital World Investors
Bank of New York Mellon Corporation
NORTHERN TRUST CORPORATION
PRICE (T.ROWE) ASSOCIATES INC
WELLINGTON MANAGEMENT COMPANY, LLP
DODGE & COX INC
Figure 9: Top 10 Institutional Shareholders (Yahoo Finance, 2012)
Currently 2,621 institutions hold 6.02 b shares in GE whereas the shares held by insiders total up to 16.79 K (Daily Finance, 2012).
Corporate Governance does affect financial performance of a company and the impact on the shareholders will be evaluated in terms of Profitability, EPS and Share Price of GE and this would be compared with competitors to further analyze the impact.
GE Turnover over five years from 2008 to 2012.
Figure 10: Analysis of Revenue from 2008 to 2012 (Daily Finance, 2012)
Even though the graph shows decrease in revenue over the years, GE had a total net income of $14.366 billion in year-end 2011. GE's Global growth incentive helped it to achieve 18% growth in industrial international revenue over the period (GE Annual Report, 2011). GE happens to be performing way better than its competitors and has greater turnover though out the 5 year period. In 2011, goal was to achieve $143.0 b in Revenue, where in fact company earned $147.3 b in actual performance (Proxy Statement, 2012)
Industrial Profit target was a $1.1 b less than the set goal but GE performed well to achieve its operating earnings goal by earning $14.8 b which is $0.7 b well above the goal (Proxy Statement, 2012).
Earnings per share of GE are compared with its Competitors as well as the industry average.
Figure 11: Analysis of EPS with industry and competitors (Daily Finance, 2012)
EPS for GE tends to be low in the Market reflecting Global Financial crisis in 2008 resulting in downturn in the economy and affecting performances of Siemens as well as GE. Due to this the turnover fell by more than 16% in 2008/09. However a 22% growth in operating EPS due to the redemption of Preference shares stock also resulted in a double increase in company's dividends !(GE Annual Report, 2011).
GE's EPS is greater than the industry's average of $0.7 per share & even though Siemens and Philips have a greater EPS than GE, Increasing trend can be seen for GE when its' direct competitors EPS fell again in 2012.
GE's Share prices comparison with Siemens and Philips.
Figure 12: GE share price growth over 5 years (Yahoo Finance, 2012)
Share prices show stability and growth over the last 5 years. Siemens and Philips tend to have a greater share price but overall GE has greater market capitalization than both. Increasing trend in the share prices from 2009 and a vast increase of 17.9% in 2012 provides evidence of increased investor confidence and improved market conditions. Competitors' trend has been fluctuating over the years. Philips specifically shows a decreasing trend compared to which GE stands strong in the industry with an increasing trend.
Overall, it can be said that GE's Financial Performance is quite reasonable and stays strong in the market in comparison with its competitors. This indicates quality Corporate Governance and effective relations with shareholders that has impacted the Financials positively.
Employees are amongst the key stakeholders of an organization. They play an important role in the success of any organization. GE keeps its employees needs in view and tries motivating them and providing a good workplace environment. GE expects its employees to act with integrity, comply with GE's Policies, and act to enforce compliance and avoid any violations (The Spirit & The Letter, 2008)
Workplace safety has been given great importance in GE and tries to get involved in the activities that prevent any workplace injuries and provide a safer working environment to its employees. It considers the health and safety of its employees as a 'law' and believes it to be the right thing (The Spirit & The Letter, 2008).
However, there had been a few cases against GE in respect to the Safety of employees in the past where it violated at least 858 rules of the Occupational Safety and Health Administration (OSHA). There were some serious injuries with substantial probability that death or physical harm could have resulted (Corp Watch, 2001). GE ensured that its Environment, Health and Safety (EHS) goals are achieved and a safe workplace environment is provided.
It can be said that the better the Corporate Governance is in an organization, the more committed the employees will be. To support this, GE introduced different employee programs which include; Matching Gifts, GE STAR Awards and United way, with a view of supporting and educating GE employees and retirees (GE Foundation, 2012)
Therefore, the overall commitment of GE's management towards its employees shows good Corporate Governance practices within GE.
Customers are amongst the key player stakeholders of a company. They need to be satisfied and informed in order to get hold of the market. GE values the relationship with its customers and finds it important to identify their need to ensure effective partnerships. GE citizenship is a program that is focused towards social environment and economic stability etc. around the globe (GE Citizenship, 2012).
Earlier in 1999, GE built dishwasher were called off having fire hazard, ignite and melt on use. Later in 2001, in relation to the dishwasher recall, GE falsely told customer that problem could not be repaired and provided partial rebates to buy new dishwashers (Corp Watch, 2001). GE is committed to compliance and maintains this culture of Governance. This puts a positive impact on the customers for their concerns are taken care of and are effectively dealt with. GE Capital recently launched web-based Access GE customer portal to help customers address diverse business issues to ensure such problems did not arise in future. Moreover, the Six Sigma quality concept is adopted in culture to ensure there is no room for error and customer expectations are met (GE Company, 2012).
Despite having few negative impacts, GE, with the help of its customers has found ways to get things better and drive towards a more sustainable world over the years. GE shows commitment & respect in fulfilling the need of its customers which also is a sign of quality corporate governance.
Society and Environment:
GE has been involved greatly in creating a sustainable ecological environment. The company's eco-magination program conceived in 2004, has had great success in terms of impact on society and environment by generating $18b in revenue and accounted for more than ninety produces in 5 years (Anon, 2011).
GE has rules under (EHS) regulations which are mandatory for GE to comply with. Under which, it tries to conduct operations in a safe manner to reduce environmental impact and ensures waste emission and activities that pollute or harm the environment are minimized (GE Citizenship, 2012).
However, there had been some unethical and non-environmental activities in the past, one of which involves toxic releases at its manufacturing plant in New York. Hefty fines were required to be paid for violating the rules. But for the betterment of society and environment, company's effective corporate governance and commitment to make world a better place did pay off through eco-magination which helped "transform GE's relationship with the world" (Anon, 2011).
Summing up the Analysis, I conclude with addressing objective 1 of this research that the overall compliance within GE appears to have positive effect on the Corporate Governance and Financial performance. In accordance to objective 5, despite having little noncompliance, enhanced disclosure and appropriate reasoning ensured best practice was adopted.
Considering objective 3, Sound Corporate Governance in GE seems to have a healthy effect on the stakeholders as well by taking care of their needs and being committed to achieving the company's goals.
Effective relations with shareholders also added weight to the meeting of the expectations of shareholders and realizing their importance in the company's long term success.
It would therefore be recommended that GE might want to look in to the matter of having separate role of CEO and Chairman to meet the requirements of SOX rules. This would help smooth succession planning and create greater chance for capable individuals to take the responsibilities.
Moreover the audit department should be scrutinized and increased independence should be practiced in this area of business to avoid independence concerns raised by the public that may impair company's objectivity in the long run.